David Laws, the man in charge of slashing public spending, was under pressure to resign this afternoon after it was revealed that he funnelled £40,000 of taxpayers' money to his secret gay lover.
The Liberal Democrat Chief Secretary to the Treasury is facing a sleaze inquiry after he claimed up to £950 a month in expenses for five years which was paid in rent to his partner.
Mr Laws was last night confronted with evidence that he could have breached Parliamentary rules on expenses, which ban MPs from renting from spouses or lovers.
He issued an apology and announced he would 'immediately' pay back tens of thousands of pounds claimed for rent and other housing costs.
The revelations are a setback for the coalition since Mr Laws's casual use of public money will undermine the Government's case for painful cuts to public spending.
Downing Street released a terse statement last night which said: 'The Prime Minister has been made aware of this situation and agrees with David Laws's decision to self-refer to the Parliamentary Standards Commissioner.'
Mr Laws is a multi-millionaire former investment banker who earned a double first in economics at Cambridge. He retired from the City at the age of 28.
Facing the expenses revelations in the Daily Telegraph, he chose to reveal that his partner is James Lundie, a lobbyist who used to work for former Lib Dem leader Charles Kennedy.
Mr Laws escaped censure by the numerous Parliamentary inquiries into expenses because he had never admitted his homosexuality, meaning officials had no way of knowing his landlord was also his lover.
He has now referred himself to Parliamentary Standards Commissioner John Lyon, who will investigate whether he broke rules which, since 2006, ban MPs from 'leasing accommodation from a partner'.
But between 2004 and 2007, Mr Laws claimed between £700 and £950 a month to sub-let a room in a flat in Kennington, South London, owned by Mr Lundie, who was also registered as living at the property.
He sold the flat for a profit of £193,000 in 2007 and bought another house nearby for £510,000.
The MP then began renting the 'second bedroom' in this property, funding it with expenses claims of £920 a month. Mr Laws's main home is in his Yeovil constituency.
In September 2009, Mr Laws switched his designated second home and began renting another flat at taxpayers' expense.
In a statement last night he claimed his desire not to reveal his sexuality had led to the unorthodox claims.
He said: 'I've been involved in a relationship with James Lundie since around 2001 - about two years after first moving in with him. Our relationship has been unknown to both family and friends throughout that time.
'James and I are intensely private people. We made the decision to keep our relationship private and believed that was our right. Clearly that cannot now remain the case.
'My motivation throughout has not been to maximise profit but to simply protect our privacy and my wish not to reveal my sexuality.'
Mr Laws's excuse for claiming so much public money was that he and Mr Lundie were not 'spouses'.
He insisted: 'At no point did I consider myself to be in breach of the rules, which in 2009 defined partner as "one of a couple... who, although not married to each other or civil partners, are living together and treat each other as spouses".
Mr Laws' position will not be made any easier by the righteous tone he has previously struck on the issue of expenses
Although we were living together we did not treat each other as spouses - for example, we do not share bank accounts and indeed have separate social lives.
'However, I now accept that this was open to interpretation and will immediately pay back the costs of the rent and other housing costs.'
He added: 'I regret this situation deeply, accept that I should not have claimed my expenses in this way and apologise fully.'
He is likely to have to pay back more than £25,000.
Mr Laws' position will not be made any easier by the righteous tone he has previously struck on the issue of expenses.
In a press release on his website from June 18 last year, the Lib Dem declared that because he rented accommodation in London he had made 'no gain from buying a property with help from the taxpayer'.
It now appears, however, that his partner did make substantial capital gains on properties that the taxpayer helped fund.
Mr Cameron has previously made a point of taking a hard line on expenses abuses among his own ranks, while Lib Dem leader and deputy prime minister Nick Clegg has boasted that his party emerged unscathed from the scandal.
The episode will also be the first test of how Mr Cameron and Mr Clegg co-operate over man management.
Under the coalition protocol that has been hammered out, Mr Clegg must be 'fully consulted' before any Lib Dem minister is removed from a government post.
Sir Alistair Graham, former chairman of the Committee on Standards in Public Life, said that it was 'staggering' that the information had only just come to light now.
'I'm a genuinely shocked that somebody who is now Chief Secretary to the Treasury is faced with disclosure of this nature where he clearly hasn't told the full truth to the people dealing with expenses in the House of Commons,' he told the BBC.
'Given all the expenses farrago that has gone on over the past two or three years the fact that it has come to light now when he is a key part of a coalition government is staggering really.
'How did this not come in the inquiry? Or why, knowing that these matters were spotlight, he didn't come forth himself.
'Even if he was trying to protect his relationship, which would appear has ended, that he didn't want to come out and say, 'There may be some question marks over expenses I have claimed and I would like to clarify the situation before we go into a general election'.'
Speaking to The Times after news of the row broke, Mr Laws said: 'When I grew up, being gay was not accepted by most people, including many of my friends.
'So I have kept this secret from everyone I know for every day of my life. That has not been easy, and in some ways it is a relief not to have to go on misleading those close to me about who I am.'
On Thursday, the newspaper asked him what his family situation was and he replied: 'single'. Asked whether he had a partner he said: 'No'.
Last night he said that he wished he had been more open. 'I realise that I have made a serious mistake, because of my failure to be honest about my sexuality. Today has been the most difficult day of my life and I apologise to James, and to all my family, friends and constituents who I have not been honest with about who I am over all the years of my life.'
He went on: 'I hope that others will now learn that it is time for people to be honest about their sexuality. Keeping secrets is much tougher than telling other people who you really are.'
Admitting that his actions would seem 'very strange for many people today' Mr Laws said that this partner, James Lundie, was the only person he had ever had a relationship with.
'Only one person was aware of who I really am - James. I hope that people will understand that fear of loss of privacy rather than desire for financial gain has been behind the problems I now have.'
Labour MP Alan Whitehead, a member of the Commons Standards and Privileges Committee in the last parliament, said Mr Laws' position would be 'very difficult' if he was found to have committed 'serious breaches' of the rules.
'Clearly if the commissioner decides that serious breaches of the rules have taken place, serious misjudgments have been made about his position, then I think his position will be very difficult,' Mr Whitehead told BBC Radio 4's Today programme.
'Certainly on the facts and the way the previous rules operated it is quite clear that David Laws seems to have broken those rules.
'The question I think behind it is the judgment call that he made, and indeed a lot of MPs made judgment calls about the previous rules - some of them disastrously bad.
'That I guess will be the centrepiece of what the commissioner for standards looks at. To decide whether the judgment call that was made by David Laws was indeed one that at least to some extent mitigated what he has done as far as his expenses are concerned.'
Mr Whitehead pointed out that the police were able to step in and start an investigation if the matter was considered serious enough.
Foreign minister Jeremy Browne, a friend and Lib Dem colleague of Mr Laws, told Today: 'I've known David for about 15 years and I can tell you categorically that this is a human story, it's not a financial story.
'He is a deeply private man and he has a personal wish not to have his life put up in lights.
'I think it should be possible to be in politics and serve your country and still maintain a private life at the same time.'
He stressed that Mr Laws had given up a lucrative City career to go into politics, and could have claimed far more in expenses if he had stated openly that he was part of a couple.
The term 'partner' in Commons expenses rules was 'ill defined' and 'not black and white', according to Mr Browne, and the Standards Commissioner would examine that situation.
However, put that Mr Laws and Mr Lundie appeared to have been together since 2001, the MP replied: 'I never said it was a casual relationship.'
Mr Browne described Mr Laws as 'brilliant' and accused the media of damaging the national interest by 'prying' into his private life.
'We are in a state of national crisis at the moment,' he said. 'We have somebody, one of the most talented, brilliant politicians of his generation in the Treasury trying to get our national finances back on their feet.
'If we have a national death wish where we want to pull people down and destroy them personally when they have devoted their life to public service, we are in a state of collective self harm.'
He added: 'This is a massive distraction, motivated possibly by politics, to tear David down.'
Mr Laws had set an 'example of frugality' by claiming less in expenses than he was entitled to over the years, the Taunton MP insisted.
INVESTMENT BANKER WHO RETIRED... AT THE AGE OF 28
Born in Surrey in 1965, he was educated at the Roman Catholic fee-paying school St George's College in Weybridge.
After graduating from Cambridge with a double first in economics David Laws swooped into the city and a successful career as an investment banker.
He worked in fixed income first for JP Morgan and then Barclays de Zoete Wedd.
He left in 1994 to become economic adviser to the Liberal Democrats and just three year later was the party's director of policy and research.
It was his second attempt at Parliament in 2001 that saw him succeed Paddy Ashdown as MP for Yeovil, winning with a majority of 3928.
Laws was re-elected in Yeovil constituency with an increased majority of 8562 at the General Election in 2005 - the highest share of the vote of any MP in Somerset, Dorset, Devon and Cornwall.
Following his re-election Laws was appointed as Shadow Secretary of State for Work and Pensions in 2005, putting pressure on the then Government to overhaul the tax credit system and reform the CSA.
A Cabinet re-shuffle in 2007, after Gordon Brown took up the job as Prime Minister, saw Sir Menzies Campbell make Laws the Shadow Secretary for Children, Schools and Families.
Laws was part of the team that negotiated the coalition deal between the Lib Dems and the Tories and the hard work paid off.
He was one of only five Lib Dems to get a Cabinet position and is now Chief Secretary to the Treasury.
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